Tag Archives: fed

Cautious Fed Sees Labor Market Strong Enough for December Hike

Bloomberg, Nov 23, 2016

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The data-dependent Federal Reserve isn’t likely to contest the evidence: The economy looks strong enough to withstand another interest-rate increase.

It will take a couple of months for U.S. central bankers to figure out the economic policies of President-elect Donald Trump. What they know now is that stock markets are hitting record highs, market-expectations of inflation are moving up and consumer sentiment has improved since the election — all of it signaling the time is right to raise the benchmark lending rate.

“They have talked it to death,” said Gennadiy Goldberg, interest-rate strategist at TD Securities USA LLC in New York. “December is on.”

Fed officials earlier this month saw a strengthening case to raise rates as the labor market tightened, with some saying a hike should happen in December, according to minutes of their Nov. 1-2 gathering released Wednesday in Washington. They made no direct reference to the national election a week later that would unexpectedly propel Trump to the White House.

“Some participants noted that recent committee communications were consistent with an increase in the target range for the federal funds rate in the near term or argued that to preserve credibility, such an increase should occur at the next meeting,” the record of the Federal Open Market Committee meeting showed. Many officials said a rate rise could be appropriate “relatively soon,” data permitting, it said.

‘Getting Stronger’

Fed officials will hold their final meeting of the year on Dec. 13-14. While it is still difficult to tell what policies Trump will put in place, market indicators are defaulting to a forecast of faster growth and higher inflation. That’s boosted expectations of a rate increase next month. Investors see a 100 percent probability of a move, according to pricing in federal funds futures contracts.

“The Fed meeting minutes say that the case for a rate hike keeps on getting stronger and stronger,” Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said in an e-mail. “Reading through their deliberations one cannot help but feel a rate hike in December is a done deal.”

The November minutes also showed officials emphasized that near-term changes in the benchmark borrowing cost would be dependent on economic data, with the expectation that “only gradual increases” would be warranted. FOMC members noted that labor market conditions had improved “appreciably.” The minutes showed diverse views on the amount of labor-market slack and the risks surrounding their 2 percent inflation goal.

“It was noted that allowing the unemployment rate to modestly undershoot its longer-run normal level could foster the return of inflation to the FOMC’s 2 percent objective over the medium term,” according to the minutes.

Stronger Economy

Since officials met the week before the Nov. 8 presidential election, they’ve seen strength in domestic consumption with retail sales in September and October showing the biggest back-to-back gains since 2014. Stock market increases have boosted household wealth. A market measure of annual inflation starting five years from now jumped to 2.1 percent Wednesday from 1.9 percent on Election Day.

U.S. central bankers have held the federal funds rate target range at 0.25 percent to 0.5 percent since December. Two officials dissented earlier this month in favor of higher rates.

Unemployment last month stood at 4.9 percent, only slightly above Fed officials’ median estimate of full employment. Core inflation measures are just below the Fed’s 2 percent target. The personal consumption expenditures price index, minus food and energy, rose 1.7 percent in the 12 months through September.

‘Good Progress’

At the same time, rates on a 30-year mortgage have jumped to 4.03 percent versus 3.54 percent at the start of the month, and the dollar is 4.3 percent stronger against major currencies, according to the Bloomberg Dollar Spot Index, possibly making U.S. exports less competitive.

“People should be looking forward to what comes next in terms of how fast the rate hikes are going to be,” Jason Pride, director of investment strategy at Glenmede Investment Management LP, said in an interview on Bloomberg Television. “December was basically in the bag.”

Fed Chair Janet Yellen told the Joint Economic Committee of Congress on Nov. 17 that the economy “is making very good progress” toward the central bank’s goals, and “the judgment the committee reached in November still pertains.”

At the November meeting, Fed officials discussed the longer-term operating framework for monetary policy, concluding that the matter warranted further discussion, the minutes showed.

“A number of policy makers stated that they continue to view expansion of the balance sheet through large-scale asset purchases as an important tool to provide macroeconomic stimulus” when interest rates are stuck at zero, the minutes showed. “Most participants did not indicate support for using the balance sheet as an active tool in other situations or for other purposes.”

The minutes noted that Yellen said the Fed would “proceed cautiously” and communicate in advance any changes to its operations.

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Top Fed official ‘very concerned’ about U.S. economy

CNN Money, Oct 17, 2016

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The Federal Reserve’s No. 2 just raised a warning flag for the U.S. economy.

Fed Vice Chair Stanley Fischer says America’s economy could be sluggish for a very long time. Low interest rates are partly to blame, he believes.

“To the extent that low long-term interest rates tell us that the outlook for economic growth is poor, all of us should be very concerned,” Fischer said Monday at the Economic Club of New York.

U.S. economic growth has averaged a sluggish 2% since 2009. Between 1990 and 2005, growth averaged a healthier 3% pace.

And Fischer knows what you’re thinking: “Well, if you and your Fed colleagues dislike low interest rates, why not just go ahead and raise them?” he asked rhetorically.

Fischer argues that factors outside the Fed’s control — such as low productivity and aging Baby Boomers — are holding down interest rates of all kinds. Remember, the Fed’s own policy has direct impact on short-term rates, but long-term rates react to more than just the Fed.

The Fed has raised rates once, in December 2015, since putting them at zero in 2008. The Fed is widely expected to hike again this December.

Why Fischer is ‘very concerned’ about low rates

Low rates spell bad news in Fischer’s view for three reasons:

1. Low rates foreshadow sluggish growth.

2. They limit the Fed’s options to handle the next recession.

3. They encourage investors to take risky bets. Not good.

Typically during a recession, the Fed cuts interest rates to make it easier to borrow money and spend, which should help stimulate growth. But if rates are already near zero, the Fed can’t do much, except put rates into negative territory — an option it really doesn’t want to use.

Being close to zero “limits the room for central banks to combat recessions,” by cutting rates, Fischer said. He went on to say the Fed would be in “deep trouble” if a recession hit soon.

Low rates also encourage investors to go into risky investments. The return on a 10-year U.S. Treasury bond — a super safe asset — is really low at 1.7%. Knowing they won’t get much return on safe assets, investors turn to stocks or high-return bonds in emerging nations.

Why rates are so low

Yes, the Fed cut rates to zero in 2008 but Fischer argues that they’re not low because of the central bank.

In his view, rates are low for four key reasons:

1. Global growth is slowing down.

2. Baby Boomers are retiring, making the labor force smaller. Fewer workers = slower growth.

3. Businesses aren’t spending much on new projects.

4. There hasn’t been a game-changing innovation (read: internet) that boosts workers’ productivity.

All those factors encourage Americans to save instead of invest. While saving is good, a lack of investment cuts down economic growth.

What would make rate go up

Interest rates would rise if there was an increase in business and government spending on better education, worker training programs, roads and bridges and innovation, Fischer argues.

One of those could be around the corner: Both Hillary Clinton and Donald Trump have promised to spend big on infrastructure to fix or improve America’s rails, roads and runways.

But business spending has been low for years and doesn’t appear to be turning in the right direction soon.

Fischer warns there’s a possibility that “low long-term interest rates are a signal that the economy’s long-run growth prospects are dim.”

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Gold’s on a Roll, Courtesy of the Fed

Bloomberg, Sep 23, 2016

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* Bullion set for biggest weekly gain since July as Fed on hold
* ‘Inaction by the Fed revived investor appetite,’ ANZ says

Gold’s on a roll, courtesy of the Federal Reserve. The precious metal is heading for the biggest weekly advance since July after U.S. central bankers opted once again to leave interest rates unchanged while reining in their outlook for future increases.

Bullion for immediate delivery traded little changed at $1,336.72 an ounce at 11:05 a.m. in London after capping a fourth day of gains on Thursday, according to Bloomberg generic pricing. The metal has climbed 2 percent this week, the most since the period to July 29, as the dollar fell and investors boosted holdings in bullion-backed exchange-traded funds.

Silver, platinum and palladium are also set for weekly advances.

Gold is headed for a third quarterly gain in what would be the longest rally since 2011, when prices rose to a record. This week, the Fed scaled back tightening plans and the Bank of Japan tweaked its stimulus focus, fueling bets European policy makers will keep their easing stance. Efforts by central banks to bolster weak growth, including with low or negative rates and asset purchases are driving demand for bullion as a store of value.

‘Revived’ Appetite

“The inaction by the Fed revived investor appetite for gold,” Australia & New Zealand Banking Group Ltd. wrote in a note. “While a cut in the Fed’s outlook for rates and the weaker U.S. dollar no doubt played a part, the continued efforts by Bank of Japan to bolster economic stimulus also helped.”

The Bloomberg Dollar Spot Index tracking the currency against 10 major peers has lost 0.8 percent this week. While Fed officials signaled they still expect one quarter-point rate rise this year, they now see only two hikes next year, down from a June median projection of three.

Bullion has plenty of backers. Among the bulls, Old Mutual Global Investors’ Diego Parrilla told Bloomberg this month that in a world of monetary policy “without limits,” where low or negative rates prevail, prices will likely soar to a record within five years.

Gold assets in ETFs have expanded every month this year apart from a dip in April, when they lost less than 1 percent. After the Fed’s decision, they rose by about 7 metric tons to almost 2,031 tons, the highest in more than two weeks, data compiled by Bloomberg show.

Spot platinum is up 4.2 percent this week, heading for its first weekly gain since the end of July. Palladium climbed 2.9 percent and silver 5.6 percent.

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Dollar Rally Fades as Odds of Fed Move This Year Drop Below 50%

Bloomberg, sep 16, 2016

The dollar rally is coming undone in a week that saw dovish Federal Reserve comments combine with disappointing economic data to cut the odds of higher interest rates this year to below 50 percent.

A gauge of the greenback fell from the highest this month after Fed Governor Lael Brainard started the week by saying the case for tighter policy was “less compelling.” Her speech was followed by a retail-sales report that fell short of analysts’ forecasts, while a measure of data surprises slid to the lowest since June. The odds of Fed action by year-end are the lowest in a month, while those for next week’s meeting have fallen to 18 percent.

“There seems to be an adjustment lower on the Fed pricing, particularly in September, but the market doesn’t want to give up on the December idea,” said Gavin Friend, a strategist at National Australia Bank Ltd. in London. “The dollar is in a bit of a holding pattern. The market is desperate for some kind of direction, but it’s spinning its wheels and it’s unable so far to find that.” 

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 of its major peers, was little changed as of 10:23 a.m. in London. It has fallen about 0.2 percent from its Tuesday close, which was the highest since Aug. 31. The dollar depreciated 0.6 percent this week to 102.03 yen, and was little changed at $1.1231 per euro.

Fed Odds

Futures show a 49.7 percent chance the Fed will raise rates this year, from a recent high of 64.7 percent on Aug. 26, after Chair Janet Yellen said the case for tightening had “strengthened.” The odds of an increase at the Fed’s Sept. 20-21 meeting peaked at 42 percent. The Bank of Japan is scheduled to hold its next policy gathering over the same two days.

“The market is hoping that we’ll come out with a greater sense of clarity” on the central banks’ policies, NAB’s Friend said.

Brainard on Monday urged “prudence” in removing policy accommodation. While Fed Vice-Chairman Stanley Fischer had also recently expressed bullishness on the economy, he stressed repeatedly that policy decisions would be data dependent

Economic indicators released Thursday showed retail sales and industrial production both declined more in August that economists forecast. 

“It’s unlikely that the Fed will go in September, and that’s reflected in the price action that you’ve seen in the U.S. dollar for the last couple of days,” said Thomas Averill, a managing director in Sydney at Rochford Capital, a currency and rates risk-management company. “There will probably be more weakness in the immediate future.”

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Fed Resists IMF Call to Allow Some Overshoot of Inflation Goal

Bloomberg, July 12, 2016

The Federal Reserve resisted a recommendation by the International Monetary Fund that the central bank be willing to let inflation modestly exceed its target, saying such a move could be counterproductive to its objectives, an IMF report showed.

The IMF last month recommended the Fed accept “some modest, temporary overshooting” of its 2 percent inflation target, given the risk that price increases will slow and the central bank may have to reverse course after raising its benchmark rate in December for the first time since 2006. The IMF made the call in a June 22 statement following the fund’s annual review of the world’s biggest economy.

The full version of the staff report released Tuesday revealed that U.S. authorities have “no intention to engineer an overshoot” and said the case for doing so wasn’t compelling. The Fed’s view also got support from “many directors” on the IMF’s board representing member countries, who “were concerned over the risks of de-anchoring inflation expectations and eroding monetary policy credibility.”

“Aiming to overshoot the medium-term target would create the risk of being behind the curve and potentially being faced with a need to raise rates more quickly especially if the labor market tightening led to a faster increase in inflation than seen until now,” according to the IMF report, which attributed the comments to U.S. officials. “This could be disruptive and undermine the achievement of the Federal Reserve’s mandates of maximum employment and stable prices.”

While the report, dated June 24, doesn’t specify if the U.S. officials were from the Fed or Treasury Department, IMF official Nigel Chalk told reporters on a conference call that monetary policy comments typically come from the central bank. As part of the fund’s consultations with the U.S., IMF Managing Director Christine Lagarde met with Fed Chair Janet Yellen and Treasury Secretary Jacob J. Lew in late-June, the report said.

“If incoming data shows economic growth continuing to pick up, labor market conditions continuing to strengthen, and inflation making progress toward 2 percent, then it likely would be appropriate to gradually increase the federal funds rate in the coming months,” according to a section that Chalk attributed to the Fed’s thinking when the IMF met with Yellen as well as with staffers in late May and early June.

The 24 executive directors of the fund, which was conceived during World War II to oversee the global monetary system, represent its 189 member nations.

While the impact on the U.S. of the British vote to leave the European Union should be small, risks are skewed to the downside, IMF staff said in an update dated July 8 and included in Tuesday’s release. If downside risks materialize, the Fed should delay interest-rate increases, IMF staff said.

Brexit hasn’t pushed up the dollar as much as expected, while declining Treasury yields have actually loosened financial conditions for consumers and businesses, muting the impact on the U.S., Chalk said. “The net effect on growth is pretty negligible,” he said.

Overall, the U.S. economy is in good shape, the IMF said. The U.S. faces anemic long-term growth, though, unless it takes steps to address a slow-growing labor force, weak productivity and a widening gap between the rich and poor, IMF staff said in the report.

The IMF reiterated its forecast from last month that the U.S. economy will grow 2.2 percent this year and 2.5 percent in 2017.